China prepared to make big changes to enhance regulatory environment
CHINA’S regulatory landscape is characterized by a proliferation of four-letter regulatory bodies and a laissez-faire approach to technology regulation that led to the rise of giants such as WeChat and Alibaba.
But China is moving to change that. A top regulation official has said he is in favour of adopting regulatory sandboxes to monitor new technologies at a time when China recently proposed reducing the number of regulatory bodies by merging its banking and insurance watchdogs.
Regulatory sandboxes are test grounds for conducting pilot trials of new financial technologies in a controlled environment for the purposes of risk, control and compliance before product launch. They have been implemented in many markets including Hong Kong, Singapore, and the UK. Analysts have argued that the lack of such regulatory hurdles has set China apart and allowed fintechs to grow at much rapid pace compared counterparts in stricter regulatory environments.
Speaking at the Asian Financial Forum, vice-chairman of the China Securities Regulatory Commission (CSRC), Yang Jiang, recently hinted at the introduction of regulatory sandboxes in China, contrary to the status quo: “In traditional regulatory practice, we should have pilot programmes. In sandbox programmes, there are trials and procedures which could help us embrace new technologies,” said Jiang.
“General guidance should be set up before [launch], giving a clear expectation and guidance to the market participants. Otherwise, what is allowed and what is not allowed, is not clear to the market,” adds Jiang.
To some, now is a good time for China to adopt a sandbox scheme, because China already has strong technology capabilities in some areas. “China is relatively strong in payment systems and big data analysis. Especially in the mobile payment system and online finance system, China is much ahead of the rest of the world,” says Jiang.
To China, serving and supporting the real economy has always been the priority of China’s finance and technology industry, as Premier Li Keqiang pointed out in his work report at the Party Congress in 2018. “If the finance industry is just chasing after profits, it is not responsible for the world economy and to investors. And this is the bottom line, to serve the real economy,” says Jiang.
Moreover, Chinese scholars and experts have raised concerns over the potential challenges inherent in the existing regulatory setup. Currently, there are several regulators with overlapping competencies, which can lead to a lack of clarity as to which regulator is in charge when responsibilities overlap.
In March, a new financial regulator combining China Banking Regulatory Commission (CBRC) and China Insurance Regulatory Commission (CIRC) was announced to oversee the banking and insurance sectors in China. The new regulatory body will be under the state council. However, the current legislative authority enjoyed by CBRC and CIRC will be passed on to China’s central bank, People’s Bank of China (PBoC) rather than the new institution.
“China’s plan to combine the supervisory agencies for the banking and insurance sectors should support efforts to move towards a more comprehensive regulatory framework that can address risks across the financial system,” says Fitch Ratings in a note. “A more unified approach could enhance regulatory oversight and help to limit contagion risks, which would be positive for the long-term stability of the financial system.”
Challenges still exist for Chinese regulators. Misconduct and illegal activities are still prevalent in China’s finance industry and are especially rife among China’s online lending platforms. In December, CBRC said it will stop giving new approvals for companies to set up online lending platforms.
Another risk faced by regulators is the “non-human” factor in big data and AI applications. In 2013, China Everbright Securities received a 523-million-yuan (US$81 million) fine for its ‘fat finger’ errors in proprietary trading, which caused chaos on Shanghai stock exchange. “Imagine if everything is automated and intelligent, a small mistake can cause a tremendous risk which cannot be manually controlled,” says Jiang.
Whether China will follow through on a plan for sandboxes is still unknown. However, recent developments indicate that China is willing to make big changes to enhance its regulatory environment.